August 09, 2016

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The Office of Compliance Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) recently announced a new initiative focusing on investment advisers’ recommendations regarding mutual fund share class purchases. According to the SEC, investment advisers have a fiduciary duty to recommend the lowest cost mutual fund share class available and appropriate for the client, and must avoid inducing clients to purchase shares in a more expensive share class merely because it generates more revenue for the investment adviser or its affiliates. The investment adviser’s ability to influence its own compensation or that of its affiliates by recommending a more expensive share class creates a conflict of interest that the investment adviser must manage or risk regulatory intervention by the SEC. Click here to read the SEC’s Risk Alert on the Share Class Initiative.

The SEC’s Risk Alert outlines three areas of focus for upcoming examinations. First, the SEC will be looking to see whether the investment adviser has been putting clients’ interests first and seeking best execution for its clients’ transactions. The investment adviser should be able to show that it has been purchasing the lowest cost shares available to its client(s) and is not structuring transactions merely to increase the investment adviser’s compensation or that of its affiliates. Second, the SEC will be looking at whether the investment adviser is making full and fair disclosures of all material conflicts of interests associated with the sale or purchase of mutual funds. A conflict is considered material if it would affect the advisory relationship, e.g., by causing the client to engage in or abstain from a recommended course of conduct. In addition to describing the compensation the investment adviser will receive, the investment adviser’s disclosures must also explain how the adviser intends to address any resulting conflicts of interest. Third and finally, the SEC will be looking to see whether the investment adviser has a robust compliance program that includes written policies and procedures, as well as documentation regarding the implementation of those procedures and the investment adviser’s current practices.

RIA Compliance Consultants encourages investment advisers to review the initiative and evaluate their current practices in light of this new share class guidance from the SEC. A subscription to our RIA Express – Compliance Review Tool includes review questions that can help your investment adviser firm evaluate its share class policies, procedures, and disclosures. If your investment adviser firm would like help developing a new mutual fund share class compliance strategy in response to the SEC’s Risk Alert, contact your consultant or click here to schedule an introductory call.


Posted by Bryan Hill
Labels: Risk Alert, SEC, Uncategorized